(16/2006)
The Revenue Department issued tax ruling No. Kor Khor 0706(Kor Mor.08)/577 Lor Wor. on 9 May 2006 to confirm the withholding tax rate applicable to interest paid to investors overseas. In this case, a Thai company had issued debentures to be sold in a foreign country, and had appointed the Depository Trust Company (DTC) in the USA to be custodian for the securities. The Company paid interest to the DTC, for this to be then further distributed to the ultimate investors.
As the DTC is established under the law of the USA, and is regarded as a financial institution, the Company argued that Article 11 Paragraph 2 (a) of the Thailand-US Tax Treaty should apply, and that it should therefore be eligible for the 10% interest withholding tax rate under the Treaty, rather than the standard 15% rate. (The Treaty provides that if the beneficial owner of the interest is a financial institution, and is a resident of the other country, the tax so charged shall not exceed 10% of the gross amount of the interest.)
The Revenue Department however ruled that the 10% tax rate will apply only if the DTC is the beneficial owner of the interest (i.e. it purchases the debentures and holds the debentures on its own behalf). If the DTC merely functions as the representative of the ultimate investors (i.e. it holds and maintains these securities and other assets for its clients), the Company will be required to withhold tax at the rate of 15%, unless the ultimate holder is also entitled to reduced tax rates under a tax treaty.
Comment: This ruling is important as it indicates that the Revenue Department may “look through” ownership structures when assessing whether taxpayers are entitled to benefits under a tax treaty.
